Facebook (NASDAQ:FB) will report third-quarter earnings after the bell on October 30. Analysts are forecasting a 5.6% rise in earnings to $1.86 per share. They also are forecasting $17.35 billion in revenue which would be a 26.4% increase. Despite being under anti-trust scrutiny, Facebook stock is up nearly 40% for the year. This nearly doubles the gains made in the S&P 500 Index which is up just a little over 20%. However, the last six months have been a roller coaster for the stock. And, as of this writing, the stock was down nearly 5% in that period.
Facebook charts are failing to push past a point of resistance at $190. And options activity suggests that traders are forecasting the stock to fall about 8% off its current level. That would put the stock at around $173.
Facebook looking to get the attention off Zuckerberg
The earnings report will give the social media giant a chance to turn the page from some recent negative headlines. The company’s founder and CEO, Mark Zuckerberg, testified in front of the House Financial Affairs Committee on October 23.
The meeting was intended to be focused on Facebook’s plan for its cryptocurrency, Libra. Congress is concerned that the digital currency could become a direct competitor to existing currencies, including the U.S. dollar. In addition, there are concerns about the cryptocurrency being used for money laundering, or harming existing global financial infrastructures.
However, the hearing put the company’s antitrust investigations in clear focus. The company is under review by investigators at the Federal Trade Commission (FTC), among others, for its competitive practices. The allegations include violations of user privacy, running a monopoly, discrimination inside the company, election security violations, misleading political ads and offering a haven for hate groups.
Facebook was hoping that Zuckerberg’s willingness to testify in front of the committee (something he had been reluctant to do in the past) would represent a thawing of relations.
It didn’t turn out that way.
Zuckerberg was largely treated as a hostile witness by lawmakers using the opportunity to score points with their constituents.
Facebook is a stock investors love to hate, but do they really?
In the month of June, over 2.7 billion people used one or more of Facebook’s platforms (Facebook, Instagram, WhatsApp, or Messenger). This means that consumers may bemoan the lack of privacy, but they’re still visiting the platforms. In fact, people often express their complaints about Facebook on … Facebook. Call it fear of missing out (FOMO), the desire to get validation for our life accomplishments, whatever the motivation, people are continuing to use the company’s social media platforms and that’s unlikely to end anytime soon.
Facebook, and its subsidiaries such as Instagram and WhatsApp, have become the lens through which many consumers view the world. In the second quarter, Facebook reported an increase in daily active users (DUA) of 8% to 1.59 billion. Monthly active users (MAUs) also climbed by the same percentage to 2.41 billion. However, much of that growth is coming from developing countries, which is one reason the company is seeing a decline in price per ad. On the flip side, the number of ad impressions is growing at a rate that is more than compensating for the decline in ad price.
What is the bottom line on Facebook stock?
Costs are rising in recent quarters as it invests heavily in user privacy and security. This is putting pressure on the social media giants’ margins. And that’s likely to be Facebook’s biggest issue. The company has been able to beat analysts’ expectations in six of the past eight quarters. However, operating margins have been dropping dramatically from being over 40% to being now below 30%.
In the second quarter, Facebook reported an adjusted operating margin came in at 39%, which was down 5% year-over-year. Its adjusted profit margin was also down 5% in the second quarter of 2018. Because of these declining margins, analysts are projecting that revenue will grow by 26% for 2019 and 22% in 2020. Earnings are expected to be weaker at 7.3% this year and 14.2% in 2020.
The company has an opportunity to show it can get its costs under control which would be a boost for their stock. However, that’s a story that’s unlikely to play out until the fourth-quarter earnings at the earliest, which makes it likely that Facebook stock will fall in the upcoming weeks.
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